Monday, October 12, 2009


Price and momentum—poles apart

Markets on Oct 12, 2009: Sharp bounce
Nifty continues to trade in the range of 4900-5150, where 4900 remains crucial on the lower side as that has been held for the third time now. Today, after consolidating in the first half, Nifty had a strong pullback that continued till the end of the session. The momentum indicators continue to be in sell mode giving a negative divergence. Usually these divergences happen at last before a strong correction. The volumes tend to decline in the final upmove and today’s volume was not in tandem with increase in price. So in nutshell, the upside looks to be capped and once the price confirms, the downtrend will resume.

On the daily chart, Nifty is trading above its 20 daily moving average (DMA) and 40DMA at 4966 and 4792 respectively, which are crucial supports in the near term. The momentum indicator (KST) has given negative crossover and is above the zero line. The market breadth was positive with 804 advances and 464 declines on the NSE and 1,642 advances and 1,192 declines on the BSE.

On the hourly chart Nifty is trading above its 20 hourly moving average (HMA) and 40HMA at 4997 and 5011 respectively, which are short-term supports now. The momentum indicator (KST) has given positive crossover and is trading around the zero line.

Nifty and the Sensex closed in green gaining 109 and 384 points respectively. Of the 30 stocks of the Sensex, Reliance Energy (up 5%) and State Bank of India (up 5.16%) were the top gainers, while Gujarat Ambuja (down 1.61%) was hit the worst.

To see full report: EAGLE EYE 14/10/09

>The End of the Earnings Recession (MORGAN STANLEY)

We believe we are now at the tail-end of the earnings recession. Our proprietary top-down EPS
model suggests that earnings troughed in the quarter that just ended. This would make the current earnings recession in EM the second longest in length (11 months) and second biggest in magnitude (–39%).

Earnings should recover because economic activity has clearly rebounded (particularly in China, India, Brazil, Indonesia, Poland, and Israel). Second, currencies have risen significantly against the US$ since 2Q, boosting the US$ value of local earnings streams. Third, for export-oriented stocks there has been a recovery in volume and pricing. Our top-down earnings model currently forecasts EPS to grow by +28% in US$ terms during calendar year 2010. This places the MSCI EM index on a prospective 2010E P/E of 14.4x. Morgan Stanley bottom-up analysts (39%) and consensus (33%) are somewhat more bullish, which requires monitoring.

China and Israel are the only countries to have escaped earnings recession. Regionally earnings have declined by –51% from the peak in Asia, –25% in LatAm, and –29% in EMEA. Whilst we still expect many Asian companies to be in the vanguard of earnings recovery, Latin America in aggregate is actually showing the earliest signs of turning the corner. The region has been largely immune from the currency and interest rate overshooting and banking system instability that were so present in the 1994 and 1997/8 cycles.

By sector the four biggest declines have been: IT (–88%) Industrials (–64%), Materials (–51%) and
Consumer discretionary (–32%). The latter is now turning up and we expect a V-shaped recovery in IT earnings. Materials and Energy (Morgan Stanley analysts are more bullish than consensus) will likely turn the corner soon thereafter.

Asia Pac ex-Japan focus list change. Switch Sinogold to Lihir and Bharti Airtel to Telekom Indonesia.

To see full report: ASIA STRATEGY


Idea Cellular (Idea), part of the Aditya Birla Group, is one of the leading providers of wireless communication services in India. Currently, the company is operating in 17 of 22 telecom circles in India, is set to become a pan-India player by end-2009. The company is a unique wireless play—strong incumbent in a tough industry environment with superior spectrum profile, as well as a new entrant capitalising on new growth opportunities. Idea’s expansion into new circles is expected to provide a leg up to its subscriber and revenue growth in the near term and offer long-term profit growth opportunities. It is slated to launch operations in five circles over the next two quarters—three category C circles (Assam, NE, J&K), one category B circle (West Bengal), and one Metro circle (Kolkata). On valuation front, Idea’s consolidated EBITDA and net profit to post a healthy CAGR of 20% and 14%, respectively, over FY10-12E. The company is in a comfortable funding position (ex-3G) post stake sale to Axiata and Providence Equity We expect Idea (incl Spice) to post a healthy revenue CAGR of 14% with new circles driving revenue growth; old circles are expected to post a 10% CAGR over FY10-12E. Revenue share of new circles is expected to touch 15% in FY12E.However the Idea Cellular stock has been de-rated by the markets over the last couple of days, and has been trading much below its issue price on the back of worries about declining revenues. Along with the Key risks that include irrational bidding for 3G spectrum and execution risks on new launches, news that hammered the stock was the TRAI’s planning to make per second billing option mandatory. Tariff cuts will intensify the pressures on the sector in the near-term.

Technicals: The counter has been witnessing a steep downtrend. The third part of the down
trend that commenced from the Rs 77 peak is currently in motion and has dragged the stock
towards its long-term support at Rs 62. The stock can form a long-term trough at this level and
move up towards Rs 72-75 again. However, the long-term outlook for this stock will turn
positive only if it moves above Rs 75. Counter bottomed out in the beginning of 2009 at the
level of 43-45 and since then it started to retrace back along with good amount of volumes and
touched the high of 92.

To see full report: IDEA CELLULAR


Reliance Communications’ (RCom) announced an aggressive tariff plan that is likely to accentuate the rising pricing pressure in the wireless sector. RCom has launched a plan titled, Simply Reliance, that offers all calls & SMS at a flat rate of Rs0.5. The plan offers voice ARPM at Rs0.36/min versus RCom’s current voice ARPM of Rs0.58/min, a 37.9% decline. While we do not expect industry realisations, post the launch, to actually decline to Rs0.36/min, the plan strengthens our case of aggressive pricing and is likely to be replicated by other incumbents. If the TRAI implements its plans of making per-second tariff plans mandatory, realisations will be impacted further. Our aggressive tariff war scenario factors in ARPMs of Rs0.51/min in FY11E and will impact valuations 5- 13% for telcos. We maintain our cautious view on the sector, but do not downgrade valuations as there is limited scope for realisations to fall below Rs0.5/min in the short-term. We maintain HOLD on BAL (target price Rs436, stress-case Rs415) and on RCom (target price Rs285, stress case Rs265) and reiterate SELL on Idea (target price Rs75, stress case Rs66).

RCom launches Simply Reliance – Aggressive but is likely to have riders as management continued with the stance of maintaining realisations above Rs0.5/min, which is unlikely if Simply Reliance is heavily subscribed to by existing subscribers.

MoU elasticity unlikely to drive growth. In the past, growth in subscribers translated to high revenue growth as MoUs expanded with falling tariffs. However, recently, elasticity of MoUs has reduced with falling tariffs and we do not expect any significant improvement in MoUs due to the reduction in tariffs.

Stress-case scenario suggests 5-13% downgrade in target price. Our aggressive tariff pricing scenario suggests further downside of 5-13% to target price of telecom stocks. Our stress-case scenario factors in Rs0.56/min and Rs0.51/min ARPMs for FY10E and FY11E, which implies a decline of 19.7%, 19.1% and 20.8% over FY09-11E, for BAL, RCom and Idea respectively.

Valuations. Telecom stocks have been the worst performers in the recent stock market rally and there are no signs of an uptick. The only hope of positive newsflow is value unlocking in the tower business, the dynamics of which are improving with consolidation in the tower industry. We do not see Simply Reliance as a strong enough trigger to factor in aggressive tariff scenario, as RCom’s earlier plans such as Monsoon Hungama and GSM Customer Experience had limited impact on sectoral financials. We maintain our cautious view on the sector and recommend BAL as our top pick with HOLD. We continue to be negative on Idea. We maintain HOLD on RCom and raise our target price slightly to Rs285/share from Rs276/share owing to inclusion of FY09 balance sheet actuals.



In-line Results; US$ Revenue Growth Remains Lackluster

Quick Comment: Infosys’ US$ revenues indicate that recovery is likely to be slow and protracted. One-time reset in EPS expectations of last quarter appears to be behind us and we do not expect any material EPS upgrades in the current quarter for Infosys. We believe the froth in the stock price should dissipate going forward as growth expectations moderate to more realistic levels.

US$ revenues disappoint: Q2 US$ revenue at US$1,154m (+2.9%qoq, -5.1%yoy) was below our and Street forecasts. Net profit of Rs15.4bn (+1%qoq, +7.5%yoy) was marginally ahead of our and Street estimates due to better-than-expected EBIT margin of 30.5% (+38bps qoq, +61bps yoy). Q2 rupee revenues of Rs55.85bn (+2%qoq, 3%yoy) were below consensus.

Rupee appreciation eroding EPS upside: FY10e guidance of Rs99.6-Rs100 (at Rs47/US$ for 2H) remains below our EPS estimate of Rs104.4. We believe at current levels the stock is already pricing in a beat of the current FY guidance. Q3 guidance at flat to 1%qoq revenue growth was inline with our forecasts.

Mid-year wage hikes to tame margin expectations: FY10e margins would be impacted by 8% offshore and 2% onsite wage hike from October onwards. Full-year margins are now expected to be in the range of -50 to -100bps yoy. We forecast EBIT margin at 29.1% (-60bps

Mgmt comments:
1) Going forward, they expect competition to intensify amongst the larger vendors.
2) Clients expect the recovery to be protracted.
3) Expect next year’s budgets to be flat yoy for clients.
4) Price renegotiations are behind us and the pricing environment is stable.
5) If utilization improves, they would have the ability to invest more in the business
6) Game has changed: Seeing demand for more lateral hires in Infrastructure and Enterprise segment.
7) Believe the worst could be behind in telecom segment
8) Do not expect a budget flush from clients in 4Q. Mgmt expects clients to hold on to budgets and transfer it to 2010.
9) Declared an interim dividend of Rs10/share (flat yoy)

To see full report: INFOSYS TECHNOLOGIES

>Phase Two - Credit cycle begins (CLSA)


Global Outlook
Investors have mistakenly attributed the rebound in equity prices to an upbeat economic future, rather than simply the survival of equity itself. Phase One was driven by a falling deflation-risk premium. In postdeflation equity rallies, Phase Two occurs when the credit cycle begins. Most investors, still fearing deflation, have failed to note that US credit is now larger than 2H08. In particular, they ignore the likelihood of a strong rebound in bank credit as banks seek to repair balance sheets through lending growth. This report seeks to show where supply and demand for credit will come from and why US equity prices have much further to go.

Equity price rises always follow the trough in the credit cycle
Since WWII, only one credit rebound did not produce an immediate equity rebound.
A rebound is more likely than ever, as the government both supplies credit and demands up to one-third of all credit.
Banks may not be growing credit, but 73% of US credit comes from outside the banking sector.

Credit in the USA is growing and about to accelerate
Government demand for credit is keeping credit growing.
Private-sector credit will emerge to buy current record-high corporate cashflows.
Banks now use record-high reserves to buy government debt and recapitalise.
Bank loans for property will create a reflexive rise in their own capital ratios.

Banks’ credit growth will result in money growth
When the banks start to create money, quantitative easing (QE) can end.
An end to QE will be good for the US dollar as ‘printing’ ends and assets reflate.
A rising US dollar is a short-term negative for emerging-market equities.

US banks can support the US bond market, but not forever
US bond yields will probably rise only slowly, due to massive buying by US banks.
Bond prices will fall as inflation rises, and then fall sharply when China revalues the renminbi.
The US government stopped creative destruction in 2008-09, but the longer-term price is the creative destruction of US government credit.

To see full report: GLOBAL OUTLOOK


Modest headline masks earning quality revival

After a sequential decline for the last two quarters, net interest income (NII) of banks is likely to improve modestly in 2QFY10, as loan spreads expand due to liability repricing and low incremental funding costs. However, high balance sheet liquidity will limit net interest margin (NIM) expansion. Headline earnings growth may take a breather after a stellar ride in the last three quarters, as tailwinds from capital gains and provision write-backs receded. We do not expect any surprises on asset quality news, with bulk of the restructuring completed in 1QFY10, except for some corporate debt restructuring (CDR) cases. Our top result picks are Axis Bank, Yes Bank and SBI.

Industry trends: Credit demand woes continue
Credit offtake continues to be subdued, coupled with ample liquidity in the financial system puts pressure on credit-deposit (CD) ratio. However, it is interesting to note that the incremental CD ratio has improved in 2QFY10 more as a function of slowing deposit accretion than higher credit growth. Subdued CD ratio has put pressure on pricing power, especially at the short end. Rate competition continues particularly in retail loan segments. However, the steep decline in lending yields witnessed in the last two quarters would be restricted as only few banks have lowered their PLR during 2QFY10.

Signs of improvement in earnings quality
2QFY10 headline profits for banks in our coverage universe are likely to increase 4% sequentially; YoY growth is expected to be 12%—slower than the run rate of 40% over the last three quarters. However, quality of earnings is likely to improve as expansion in loan spreads will drive a 6% sequential pick-up in NII after witnessing a decline in the last two quarters. Margin expansion will be modest as CD ratios have remained subdued. Earnings quality is expected to improve as dependence on capital gains and provision write-backs decline. Sectoral averages hide substantial difference in sequential earnings growth trajectory for private and public sector undertaking (PSU) banks. Boosted by margin expansion on account of liability repricing, continued low incremental funding costs and calibrated growth strategy, private banks should report healthy 11% QoQ PAT growth; PSU banks’ sequential PAT growth will likely be more modest at 1%.

Asset quality: No surprises expected
With a large part of restructuring completed in 1QFY10, we do not anticipate any negative surprises on asset quality, except for some CDR cases. Retail delinquencies across private banks are close to their peak and are expected to trend down 3QFY10 onwards.

To see full report: BANK EARNINGS PREVIEW

>TATA MOTORS - Investor presentation

Short Term Business Outlook

  • Current Business conditions remain uncertain; however expect Indian economic growth to revive earlier than world economy

Commercial vehicles sales to be driven by
  • New products : World Truck, Ace variants
  • Bus demand from JNNURM scheme
  • Improved penetration of LCV Passenger carriers
  • Truck demand on the back of renewed economic activities
  • Emission change effective Apr 2010
Passenger Vehicle sales to be driven by
  • Full year availability of Indica Vista
  • New sales of Nano and launch of New Indigo, Fiat Linea, Grande Punto
Jaguar and Landrover introduced in India from June

To see full presentation: TATA MOTORS


Objective of the fund: The objective of the fund is to generate long-term capital appreciation by investing 80-100 per cent of the portfolio in units of Mirae Asset China Sector Equity Leadership Fund or units of other mutual fund schemes / Exchange Traded Funds that focus on investing in equity and equity related securities of companies domiciled or having their area of primary activity in China and Hong Kong.

The debt portion 0-20 per cent which includes money market instruments / debt securities would include debt / liquid schemes of domestic mutual funds.

Thus this fund provides an exciting opportunity for investing in the growth of China. It provides opportunities to invest in niche sectors like Chinese wine, traditional Chinese medicines, securities, agriculture, hydro power, animal vaccine, machinery parts, etc

The existing fund will be a feeder fund to Mirae Asset China Sector Equity Leadership Fund. Mirae Asset Global Investments (HK), the investment manager to Mirae Asset China Sector Leader Fund, has a dedicated research team focusing on investing in the Chinese markets and currently manages over USD 8 billion (approx Rs. 38400 crores) as on August 2009.



Petronet LNG (PLNG) is one of the largest LNG players in India and is set to play a significant role in country’s full scale drive to ensure its energy security in the years to come. The company has set up its first LNG Terminal at Dahej, Gujarat, with a capacity of 5 MMTPA, and is in the process of setting up another terminal at Kochi, Kerala, with a capacity of 2.5 MMTPA. The company was co-promoted by India’s largest oil majors GAIL, ONGC, IOCL and BPCL.

During Q1FY10, it reported revenue of Rs 2,604 crore which was in line with our expectation, down 2% q-o-q and up 58% y-o-y. Volume was in-line with our expectation at 95.8TBTUs, up 16% q-o-q. The volumes included 61TBTU from RasGas, 15TBTU for Dabhol and 6TBTU on a spot basis. Profit was below our expectation due to lower regasification charges. We believe that regasification charges on the spot volumes were under pressure due to commencement of supply
from KG D6 gas basin. Expanded capacity at Dabhol has been commenced on 15th July’09.

Higher Regassification Charges– RasGas volume remains steady at 62.7TBTU whereas spot volume has jumped by 65% q-o-q to 33TBTUs. Increase in spot volume is attributed to globally lower LNG prices. In Q1FY10 Henry Hub spot prices were down 19% q-o-q to $3.7/mmbtu. Regassification charges declined 56.7% q-o-q and 26.2% y-o-y to Rs 21.1/mmbtu. In Q4FY09, company earned marketing margin on some of the cargo which was absent in Q1FY10. In current quarter company had provided the regassification service to the cargo bought by GSPC and earned Rs 8.4crore; backward calculation give us Rs 28.5/mmbtu regasification service charge which are in-line with the RasGas margin. However with increase in domestic supply, we expect spot margin will be under pressure. EBITDA margin dropped by 469bps y-o-y to 7.0%; lowest in last 4 years. Other income increased 44% to Rs 28.8crore. On account of lower operating profit, PAT declined by 49.4% q-o-q and 2.2% y-o-y to Rs 103.3crore.

Other Developments – PLNG will start sourcing additional 2.5mtpa from RasGas for the expanded Dahej capacity from September’09. Expanded Dahej capacity is handed over to the PLNG in May’09 and operation has been commenced on 15th July’09. In Jan’09, Petronet had received a 5% escalation in its long term Rasgas to Rs 30/mmbtu. FOB price for 2009 increased from $2.54/mmbtu to $3.1/mmbtu and would rise further in 2010 and 2011.

Our View
Current low spot LNG prices ($3.4/mmbtu) may continue for few more months as the Asian markets have seen demand destruction in spot cargo. Falling global LNG prices will neutralize the price concern against KG D6 gas and keep volume intact. RasGas base contract will reach full capacity in Q4FY10 of 7.5mtpa. However, going forward capacity utilization will be under pressure and long term business viability concerns remain as India moves from a deficit of gas to surplus. We are expecting a 3-6 months delay and cost escalation in Kochi terminal. From Q2FY10, interest and depreciation costs to increase with commencement of extended Dahej capacity.

We have maintained our estimates for FY10 and FY11 volumes to 8.0mtpa and 8.7mtpa due to weakening in LNG spot prices. We have reduced out regassification charges due to lower expected spot margin going forward. Our EPS for FY10 is Rs 7.4 against our previous expectation of Rs 7.8. We are upgrading the stock from REDUCE to HOLD rating on the stock back of multiple expansion taken place in the Indian equity market and increased revenue visibility. Key Risk for the stock can be 1) Declining spot margin & underutilization 2) recent out-performance of the stock 3) unexpected and prolong delays in sourcing long-term gas 4) execution risk associated with the Kochi terminal. Our new revised price target is Rs 80 is 10x FY10E EPS of Rs 7.4 reflects multiple expansions taken place in Indian equity market giving a upside of potential of 10% from the CMP.

To see full report: PETRONET LNG